Wednesday, August 10, 2005

Beyond belief

It comes to something when what appears to be a cause for celebration is, in fact, the tip of an iceberg of criminal enterprise of monumental proportions. That, however, is just the case with June's trade figures.

The good news is that exports to non-EU countries were up by 15 percent compared with May, producing an apparent £1bn improvement in the trade deficit. The bad news is that the "improvement" is almost certainly entirely due to VAT fraud, with criminal gangs re-exporting the same goods over and over again (on paper) in order to claim back the VAT, whence they disappear.

According to Bloomberg, the fraud is concentrated on high-value goods like mobile phones and computer parts and, in the words of a government spokesman, amounts to "a systematic criminal attack on the VAT system."

It seems that the scale of the problem only became apparent 10 days ago and the announcement has reignited criticism of the accuracy of government figures. Two years ago, a similar fraud prompted the statistics office to undertake its biggest-ever set of revisions to trade data.

Three countries seem to be mainly involved, Dubai, where exports increased by 529 million pounds in June, more than double the growth of 207 million pounds recorded in May, Nigeria with a 51 percent increase and Russia with 36 percent.

Thus, despite the trade deficit with EU member states widening to £2.8 billion pounds, overall exports of goods gained 7.5 percent in June to £18.2 billion pounds, from £16.9 in May - the highest since records began in 1697.

This the first time fraud on this scale has been detected, and, since 1990, VAT fraud is estimated to have cost the Exchequer at least £20bn - another cost attributable to our membership of the EU. Interestingly, though, we are not alone.

Recently, according to the newspaper Sueddeutsche Zeitung, a wave of VAT fraud had been hitting Germany, with suspicions that the proceeds are being used to finance terrorism. And, compared with the UK, costs were even higher, the annual loss estimated at €20 billion (£14 billion).

So vulnerable is this highly complex, bureaucratic tax, with multiple payments and refunds, that it is a fraudster's dream, and no sooner is one loophole plugged than criminal gangs find another scam. Were we free agents, the tax would have been long abolished, and replaced with the simpler and less fraud-prone sales tax.

But, of course, this is an EU tax, so member states continue to haemorrhage funds, while criminals – terrorists amongst them – get rich. But, why we tolerate this is beyond belief.